8 Essential Steps to Roll Out a Sales Commission Plan
In every well-managed organization sales commission plans change regularly. To outsiders, this is often surprising. Why, the finance person wonders, is it that we need a new commission plan this year?
The reality is that commission plans must change to reflect new business priorities. In any good business, although the mission and vision are (ideally) constant, the initiatives undertaken to fulfill that vision are not. If a business intends to execute on three new strategic initiatives in 2016, would it make sense to retain the commission plan that was built around last year’s goals?
Assuming you’ve planned ahead, you’re starting to design your 2016 sales commission plan. Great! Now the questions become:
- how do you make sure that you get the plan right?
- how do you ensure an effective roll out?
Step One: Set Expectations (well in advance)
The single most critical component of an effective plan rollout is communication. Ideally, at least one quarter (if not six months) before the plan changes everyone on the sales team knows that changes to the commission plan are being evaluated. When you communicate that changes are coming, you should be clear on a) why you think the plan needs to change and b) what the key behaviors are that you want to reward going forward. If done successfully, there won’t be any surprises when the new sales plan is shared with the team.
Step Two: Build a Roundtable
When designing a commission structure or even just brainstorming ideas it’s easy to fall into the trap of allocating all of your time to decision makers (VP of Sales, CFO) and financial models. This is a great way to design a plan that underutilizes or completely ignores the collective wisdom of your sales team. To tap into that knowledge, you should recruit a small group of top-performing sales people and assemble them into a feedback roundtable. This becomes a great source of ideas and feedback on plan proposals. Perhaps most importantly, when it is time to roll out a plan, this group will become the plan’s biggest cheerleaders, as the new commission structure is something they genuinely helped create.
Step Three: Identify Candidate Plans
With a feedback group in place, it’s time to winnow down the commission plan options from a universe of possibilities to just a handful of options, ideally no more than three. Getting to that list shouldn’t be hard; lay out the strategic priorities for the business over the next year and cross-reference them against the initial suggestions you’ve received from the roundtable, it should be clear to you what your best options are.
At this time, it’s also appropriate to float those ideas by the people who will eventually have to sign-off on the plan including the CFO, SVP of Sales, and potentially the CEO. There is no point in running the numbers or sharing these options with a feedback group if the top-level executives aren’t on-board at the concept phase.
Step Four: Backtest, Backtest, Backtest
So, you have a few commission candidate plans and now you need to answer the important question of; what quotas do I want to set, what should the accelerators be, and how would most reps fare under the new system?
To answer these questions effectively, you’ll need to setup a financial model for each of the plans you’re considering. The model should tell you not only what any rep would earn under some hypothetical attainment level, but what they *would have* earned during any previous period, going back about (ideally) as long as each rep has been working at the company.
The results of that analysis should be compared against each other as well as historical actuals. You want to makes sure you have a clear sense of how every plan impacts each member of the team. In particular, you should focus on the following questions:
- How do underperformers and overperformers fare under the new plans; generally, you want the reps who are contributing the most to the company to earn more and the reps who are contributing the least to earn less.
- Is the average rep able to achieve their on-target earnings under the new plan? It’s important that commission targets are attainable, and in-line with the rep’s expectations.
- For reps that earn much more or much less under the new plans, do you feel that those outcomes are appropriate? For those earning more, is the company okay with the added cost? For those earning less, will you be able to provide them with an honest, logical, and thoughtful explanation for why? And if that doesn’t assuage them, is that something you can live with?
Step Five: Socialize
After a lot of thoughtful modeling, tuning, and tweaking you now have a handful of viable candidate plans with back-tested historical results. It’s time to run that by your decision makers, roundtable, and a few members of the sales management organization.
This stage of the process is an important to make sure that you a) haven’t lost conceptual buy-in from important parties and b) you want the team to be generally supportive of the impact of the plan both to their teams and to them individually.
Step Six: Finalize
In the socialization process, you’ll get feedback about the plan and, ideally, identify any sales reps that are affected, favorably or unfavorably, by the new plan in a surprising way. Now the name of the game is to use that feedback to make whatever tweaks to the model are necessary to resolve all concerns and get to a finalized commission plan out the door. Sometimes adjustments can be as simple as adjusting a quota or a payout rate. Alternately, if you need to address some edge-case, you may need to introduce qualifying criteria to safeguard against extreme over or underpayment.
Step Seven: Over Communicate & Roll-out
Now that you’ve invested all of that time and effort in building, socializing, and finalizing the plan, you need to make sure that you have an effective roll out. You should be sure to:
- Present the new plan to the sales team. Ideally, this should be done at an all hands with a slide deck.
- Provide everyone with a plan calculator that will empower them to calculate sales commission earnings.
- Share a side-by-side comparison of commission earnings under the new plan against old plans. Reps should have a clear understanding of how they’ll be impacted by the new plan. If they’re impacted unfavorably, this a great time to tell them why, and to share what they need to do to be successful in the future.
- Schedule office hours. Allow reps to come meet you or ask questions about the plan.
Step Eight: Hold the Line
As you start to run commissions on the new plan, you’ll invariably hear some grumbling and / or negative feedback. This will include sentiments like:
- “Isn’t it strange that the commission plan doesn’t incentivize this type of behavior?”
- “I made twice as much on this same deal last year”
- “This person is making more than me even though they’ve hardly been here any time”
It’s often tempting to dig into those concerns, to go back and look at the model and see if you can’t tweak the numbers, add another qualifier, etc. It’s likely that one or more sales manager will say that the plan really needs to change for these X reasons.
Regardless of the pressure on you to change the plan, don’t do it. You just went through a multi-week design, analysis, and vetting process with all stakeholders, right? Why would you make a snap decision to throw that all out of the window now? It’s important that changes to compensation structure are well thought out, messaged, and not impulsive. So stick to your guns.
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I'm Jake. I built and scaled out LivingSocial's sales team (back when it had 30 employees) that wrought its meteoric rise to 3,000 employees globally and $800m in revenues in 2014. I did the same at AdRoll in 2014 taking the firm from a healthy 60 sellers in one country to over 200 in four countries in 2016. I live and breathe sales comp and know just how powerful that lever is. My team and I built Compgun because I know much agility anyone in my role would gain with a fast, simple, versatile tool to manage the front line of the company.